Problem 1

California Surplus Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on
reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected
30% in 2013 and 30% in 2014. The accounting and tax data is shown below.
Financial Accounting
2012 tax rate
Income before temporary difference
Temporary difference
Income

35%

2013 tax rate

Income before temporary difference
Temporary difference
Income

30%

2014 tax rate

Income before temporary difference
Temporary difference
Income

30%

175,000
75,000
250,000

200,000
200,000

180,000
180,000

1) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes p
beginning of 2012.
2012
Pretax financial income
Taxable income
Temporary difference originating (reversing)
Cumulative temporary difference at the beginning of the year
Cumulative temporary difference at the end of the year

Pretax financial income

Enacted tax rate
Current tax expense for 2012 (Income taxes expense)

Taxable income
Enacted tax rate
Current tax expense for 2012 (Income taxes payable)

250,000
200,000
50,000
50,000

2012
250,000
35%
87,500

2012

Installment Accounts
Receivable

Future Taxable
(Deductible) Amounts

Temporary Difference
$

200,000
35%
70,000

50,000

Tax Rate
35%

Deferred tax liability at the end of 2012

Deferred tax liability at the beginning of 2012
Deferred tax expense for 2012 (increase in deferred tax liability)

Deferred tax expense for 2012

Current tax expense for 2012 (Income taxes payable)
Income tax expense for 2012
2012
Income Tax Expense
Income Taxes Payable
Deferred Tax Liability
Future Taxable
(Deductible) Amounts

Temporary Difference
Installment Accounts
Receivable

87,500

Tax Rate

25,000

30%

Cumulative temporary difference at the end of 2012

Newly enacted tax rate for future year
Current balance of deferred tax liability
Adjustment due to decrease in enacted tax rate
Deferred tax liability at the end of 2013
Deferred tax liability at the beginning of 2013 after adjustment
Deferred tax benefit for 2013 (decrease in deferred tax liability)
Deferred tax expense for 2013
Current tax expense for 2013 (Income taxes payable)
Income tax expense for 2013
2013
Deferred Tax Liability
Income Tax Expense

2,500

Income Tax Expense

Deferred Tax Liability
Income Taxes Payable
Future Taxable
(Deductible) Amounts

Temporary Difference
Installment Accounts
Receivable

60,000
7,500

Tax Rate

30%

Deferred tax liability at the end of 2014

Deferred tax liability at the beginning of 2014
Deferred tax benefit for 2014 (decrease in deferred tax liability)
Deferred tax benefit for 2014
Current tax expense for 2014 (Income taxes payable)
Income tax expense for 2014
2014
Income Tax Expense
Deferred Tax Liability
Income Taxes Payable

54,500
7,500

2) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment
December 31, 2012
Current liabilities
Deferred tax liability
December 31, 2013
Current liabilities
Deferred tax liability
December 31, 2014
There is no deferred tax liability to be reported at this date.
3) Show the income tax expense section of the income statement for each year, beginning with Income before
2012
Income before income taxes
Income tax expense
Current
Deferred
Net income
2013
Income before income taxes
Income tax expense
Current
Deferred
Adjustment due to decrease in tax rate
Net income
2014
Income before income taxes
Income tax expense
Current
Deferred
Net income

nd sold an investment on an installment basis. The total gain of $75000 was reported for financial
the sale price is collected in 2012 and the rest in 2013 and 2014. The tax rate was 35% in 2012, and

Tax Return
$

175,000
25,000
200,000

200,000
25,000
225,000

180,000
25,000
205,000

s, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the

2013
$

2014
200,000 $
225,000
(25,000)
50,000
25,000 $

2013
$

2014
200,000 $
30%
60,000 $

2013
$

180,000
30%
54,000

2014
225,000 $
30%
67,500 $

eferred tax liability)

180,000
205,000
(25,000)
25,000
-

205,000
30%
61,500

Deferred Tax
(Asset)

Liability
$

17,500

17,500
17,500

17,500
70,000
87,500

70,000
17,500
Deferred Tax
(Asset)

Liability
$

7,500

50,000
30%
15,000
17,500
(2,500)

$
$

3 after adjustment
eferred tax liability)

7,500
15,000
(7,500)

$
$

(7,500)
67,500
60,000

2,500

67,500
Deferred Tax
(Asset)

Liability
$
$
$

eferred tax liability)

$
$

61,500

7,500
(7,500)
(7,500)
61,500
54,500

year. (Assume Installment Accounts Receivable is classified as a current asset.)

2
$

17,500

7,500

nning with Income before income taxes.

2012

250,000

87,500
162,500

200,000

57,500
142,500

180,000

54,000
126,000

70,000
17,500

2013

67,500
(7,500)
(2,500)

2014

61,500
(7,500)

Problem 2:

The Ambrosia Corporation's lead accountant shows the following info:

On Jan 1, 2012, Ambrosia purchased a bottling machine for
A)
Straight-line basis depreciation for 5 years for tax purposes (Use the half year conventio
B)
Use 8 year useful life for financial reporting
C)
Tax- exempt municipal bonds yielded interest of
D)
$2,300,000 in 2012 and
Pretax financial income is
The company recognized an extraordinary gain of
E)

F)

Taxable income is expected in future years with an expected tax rate of .

1)

Compute taxable income and income taxes payable for 2013.

Book Depreciation
2012 $
2013
2014
2015
2016
2017
2018
2019
Totals
$

Tax Depreciation

100,000 $
100,000
100,000
100,000
100,000
100,000
100,000
100,000
800,000 $

80,000
160,000
160,000
160,000
160,000
80,000
800,000

Difference
$

Pretax financial income for 2013

Nontaxable interest
Excess depreciation ($100,000 $160,000)
Taxable income for 2013
Tax rate
Income taxes payable for 2013
2)

20,000
(60,000)
(60,000)
(60,000)
(60,000)
20,000
100,000
100,000
$2,400,000
(150,000)
(60,000)
$2,190,000

35%
$766,500

Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013.

Future taxable (deductible) amounts

Enacted tax rate
Deferred tax (asset) liability

2013
(60,000)
$

2014

35%
(21,000) $

(60,000)
35%
(21,000)

SchedulingEnd of 2013
2014
Future taxable (deductible) amounts
Enacted tax rate
Deferred tax (asset) liability

(60,000)
35%
(21,000)

Deferred tax asset at the end of 2013

Deferred tax asset at the beginning of 2013
Deferred tax expense for 2013 (decrease in deferred tax asset)
Deferred tax liability at the end of 2013
Deferred tax liability at the beginning of 2013
Deferred tax expense for 2013 (increase in deferred tax liability)
Deferred tax expense for 2013 (decrease in deferred tax asset)
Deferred tax expense for 2013 (increase in deferred tax liability)
Net deferred tax expense for 2013
Current tax expense for 2013 (Income taxes payable)
Deferred tax expense for 2013
Income tax expense for 2013
3)

Prepare the deferred income taxes presentation for Dec 31, 2013 balance sheet.
Income Tax Expense
Income Taxes Payable
Deferred Tax Asset
Deferred Tax Liability

787,500

Income before income taxes and extraordinary item

Income tax expense
Current
Deferred
Income before extraordinary item
Extraordinary gain
Less applicable income tax
Net income

800,000

Use the half year convention for tax purposes, as discussed in Applendix 11A).

tax rate of .

$150,000 in 2013.
$2,400,000 in 2013.
$150,000 in 2013 (which is fully taxable).
35%

e, and deferred taxes for 2013.

Future Years
2015

(60,000)
35%
(21,000) $

2016

2017

(60,000)
35%
(21,000) $

2018
20,000
35%
7,000 $

100,000
35%
35,000

Future Years
2015

(60,000)
35%
(21,000) $

2016
(60,000)
35%
(21,000) $

2017

2018
20,000
35%
7,000 $

100,000
35%
35,000

7,000
$

7,000
14,000

$
$
$

14,000
7,000
14,000
21,000

766,500
21,000

787,500

766,500
7,000
14,000

$
$

714,000
21,000

2,250,000

735,000

1,515,000
150,000
52,500

97,500
$

1,612,500

2019

100,000
35%
35,000 $

2019

Total

100,000
35%
35,000 $

(20,000)
(7,000)

Total
40,000
14,000